Deadline looms for Greek debt swap deal

Private holders of Greek debt must decide by 10pm (GMT+2) Thursday whether to accept a writedown to slash €100 billion from the country's €350 billion in debt. Greece is set to default in less than two weeks if too few investors agree to the swap.

AP - Greece’s race to slice €107 billion ($140 billion) off its national debt entered the final stretch Thursday, with markets confident enough private investors will decide to accept a deal to write down the value of their Greek bond holdings.

If too few investors agree and the swap fails, the crisis-hit country will likely default on its debt in less than two weeks, prompting renewed turmoil in financial markets and knocking confidence in the global economy.

But markets appeared optimistic that Greece would muster enough support. Greece’s stock exchange was up 1.9 percent, while the Stoxx 50 of leading European shares rose 1 percent. The euro was trading 0.6 percent higher at $1.3220.

The bond swap is a radical attempt to finally pull Greece out of its debt spiral and put its shrinking economy back on the path to recovery. The hope is that by slashing the overall debt it has to repay, the country that is in a fifth year of recession can gradually return to growth.

The task at hand, even with the debt reduction, is massive. Official figures released Thursday showed unemployment shot up to a record 21 percent in December, compared to 14.8 percent last year -- it’s even worse for young people with 51.1 percent of those aged between 15 and 24 out of work.

By early Thursday, banks, pension funds and other investors holding more than half the €206 billion ($270 billion) total debt in public hands had pledged to take part. New legislation will allow Greece to force holdouts into accepting the deal if overall participation is not high enough.

Investors have until 10 p.m. local time (2000 GMT) to sign up. Only bonds held by private investors are part of the deal, meaning that outstanding amounts held by the European Central Bank and other central banks are exempt. Athens will announce the results early Friday morning, after which finance ministers of European countries using the euro are to discuss the outcome in a conference call.

“Obviously for the majority of bondholders it does make sense to accept the deal as it is better to get something rather than nothing and if the exchange failed and Greece undertook a disorderly default then the likelihood is that nothing is close to what bondholders would recover,” said Gary Jenkins, managing director of Swordfish Research. “Thus the most likely outcome remains that Greece will receive enough acceptances to move ahead with the deal and trigger the second bailout package from the EU.”

The complex bond swap, known as the Private Sector Involvement, or PSI, is critical for Greece to secure a ¤130 billion ($171 billion) package of rescue loans from other eurozone countries and the International Monetary Fund. Without the funds, Greece faces a potentially messy default that could drag down other financially vulnerable countries in Europe and threaten the joint currency itself.

Ratings agencies have said they will lower Greece’s sovereign rating to reflect it is in default once the deal is announced, making it the first eurozone country to have such a credit grade. The agencies are then expected to upgrade their rating when the new bonds are issued.

Athens has said it needs 90 percent participation for the deal to be successful. However, it has said it can trigger legislation to force holdouts to go along if creditors holding between 75 percent and 90 percent sign up.

The Institute of International Finance, which has been leading the debt talks for large private creditors, said 32 firms holding €84 billion ($111 billion) of Greek bonds have agreed to the deal, including major German, French, Greek and Cypriot banks. German reinsurer Munich Re, which holds some €1.6 billion ($2.1 billion) in Greek bonds, also said it will participate.

On top of that, some €17.5 billion ($23 billion) in bonds owned by Greek social security funds but managed by the central bank will also be part of the swap. Five social security funds which hold about €3 billion ($3.9 billion) in bonds have voted against participating, while another eight had signed up to the deal by Thursday morning.

However some creditors, notably hedge funds, are expected to hold out, hoping to scupper the deal and trigger the payment of credit default swaps -- essentially insurance against a default. The use of legislation forcing holdouts into the swap, known as “collective action clauses” could also trigger the payment of CDS, an event which is determined by the International Securities and Derivatives Association.